Grab Las Vegas Sands On Irrational Negative Sentiment

Jun.20.14 | About: Las Vegas (LVS)


The constricted revenue growth for the previous month stalled at 9.3%, against analysts' expectations of 13-15%, according to the Gaming Inspection and Coordination Bureau.

According to CLSA estimates, Japan has the potential to generate $40 billion in annual gambling revenues.

The recent law puts a wedge in the stay of the Chinese consumer base in Macau, which is expected to result in fewer customer visits.

Las Vegas Sands Corp.'s (NYSE:LVS) stock has been decreasing since March; the stock price of the company has faltered by 16% over the past three months. I believe that now would be a good to time to take a long position in the stock, since the weakness in price has essentially created a buying opportunity. The industry grew by approximately 20% over the previous year to $45 billion; however, a lower growth of around 12% is anticipated to be realized by the end of this year.

Money Laundering Issue

The gaming industry in Macau has been under stress for some time due to a number of reasons. The constricted revenue growth for the previous month stalled at 9.3%, against analysts' expectations of about 13-15%, according to the Gaming Inspection and Coordination Bureau. The major reason stipulated for the lower-than-expected growth is the reluctance of VIP gamblers to enter the city in the wake of stricter rules and regulations. Macau has put a limit on the cash gamblers can spend in a day, which led to an opportunity for money launderers to profit. However, the country is taking steps to discourage money launderers by inducing stricter rules and regulations.

Macau Restricts Chinese Visitors' Length of Stay

Chinese tourists drive the gambling industry in Macau, and account for a large chunk of the total gambling revenues generated annually. Hence, the recent imposition of the new law that downsizes the length of stay of the Chinese consumer base from seven days to five is expected to directly dent the industry's revenues this year.

According to the recently gathered government data in the first quarter of the present year, 67% of the total tourists in the city came from China. However, Chinese tourists have been reportedly abusing their stays in Macau. Evidently, "2.08 million mainland Chinese arriving in Macau using a transit visa didn't go on to a third-party country, representing 11.2% of total mainland Chinese visitors for the year", as reported by Bloomberg. The new law, however, is intended to prevent this activity in the future by penalizing visitors in violation of the law. Visitors found guilty of repeated violations will be restricted from entering the city. This law is expected to further slow down the visits from Chinese customers in the future.

Japan May Act as a Growth Catalyst

In my opinion, people who are selling off their positions because the revenue growth projections have been revised downwards are not making the right decision. All is not lost! The sales are still expected to grow, and more often than not, stock prices are in direct correlation with top and bottom line movements. It is true that Macau has proven to be the most profitable spot for the company up until now, but it is not the only location where the company has established its operations. Where Macau is speculated to show a drop in revenues, Japan is expected to be a growth opportunity for the company. LVS had previously mentioned Japan as a prospective expansion site, and intends to enter it as soon as the country legalizes gambling.

According to CLSA estimates, Japan has the potential to generate $40 billion in annual gambling revenues. Up until now, Japan was inaccessible for casino investments, since gambling has remained an illegal activity in the country. It is highly likely, though, that the country will soon open the gates for casino owners around the globe, as the country has submitted a bill backed by Prime Minister Shinzo Abe on December 5th, 2013 to legalize gambling in Japan. The discussions on the bill are have taken a serious turn, and there is quite a high probability that the bill will be passed by next year. Advocates of the bill anticipate that the industry could act as a growth catalyst for the country, and bolster tourism and regional activity. The bill is expected to be passed by next year, just in time for the 2020 Tokyo Olympics.


In addition to the discussion above, the multiples-based valuation indicates about 15% upward potential in the stock price of the company. For my model, I have allotted varying weights to different price multiples, based on their relationship to the company's financials. Since P/E ratios and cash flows have a more direct relationship to the overall financial performance of the company, they have been given a higher weight. On the other hand, P/B and P/S have been given a lower weight, since book value is a historical figure, while revenues are just a starting point to assess the financial performance of any company. Take a look at the following image to see the fair price the model suggests for LVS.

Source: Yahoo Finance; Reuters; Morningstar

Concluding Remarks

In my opinion, the current weakness in price is a buying opportunity. The future expected investments and the multiples-based valuation of the company suggest the same. Although growth estimates for Macau have been slashed, note that revenues are still expected to grow at a double-digit rate. In my opinion, the price dip is nothing more than irrational investor sentiment.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.